by Peggy Mika
Special to Delaware Business Times

Hospitals are increasingly placing patients under "observation care" or "observation status" rather than admitting them.

The ramifications of receiving care under observation status can be costly for Medicare patients who are paying out of pocket for their hospital stay as well as for skilled care they may need before they leave the hospital.

Keeping patients under observation status can also be a financial hardship for hospitals, because Medicare only pays about one-third of the costs of outpatient care. The hospital must bill the patient for the rest. In many cases, the patients cannot pay.

Admitting patients when it is not medically necessary, according to Medicare - can also be costly for hospitals. Medicare audits hospital admissions going back four years and if an audit finds an admission which should have been coded as observation, the hospital must reimburse Medicare.

Part A and Part B

Observation care, a Medicare billing designation, refers to a period of time when a patient is being observed in the hospital to determine the cause of his/her symptoms. The patient may be transferred to a room and stay for several days - in a gown, in a bed, eating hospital food - and continue to be under observation and pay outpatient care rates when the bills follow.

Medicare Part A covers hospital care for inpatients. Outpatients are covered under Part B and face higher payments for drugs, imaging services and coinsurance for the hospital stay. But, the real shocker is the cost for skilled care they may need when they leave. Medicare pays the full cost of skilled nursing for the first 20 days and most costs up to 100 days - but only for patients who have spent three consecutive days as inpatients. Observation patients must pay those charges on their own.

Although patients, by law, must be informed of their status, the significance of the information may be lost on someone who is suffering from distressful symptoms. Hospitals are not likely to change the patient's status, and patients who have already spent days in the hospital will be billed for care even if they leave.

The why of observation care boils down to money. Medicare does not want to pay for non-acute care in an acute-care setting, said Wayne A. Smith, president and CEO of the Delaware Hospital Association.

Hospitals, caught between muddy Medicare admission rules and unhappy patients, would prefer to admit patients because Medicare pays them 100 percent.

Hospitals have other costs. They have to hire additional staff to prepare for Medicare audits and track them.

"The dollars are significant," Smith said.

In addition, hospitals are penalized for readmitting a patient within 30 days. Hospitals with readmission rates above the national average receive lower Medicare payments; the higher the rate of excess admission, the greater the penalty. The fines are intended to push hospitals to provide better care for patients during their hospital stay and after they are sent home. Some Medicare advocate groups and patients believe this practice makes it more likely that hospitals will classify patients as outpatients.

Why is it so difficult for hospital staff to determine inpatient and observation status? The hospital's mission is to provide the best possible care in a moment of crisis - often saving a life. The mission of the Centers for Medicare & Medicaid Services (CMS), which administers the Medicare program, is financing care. That creates a "natural tension," Smith said.

(CMS did not respond to our request to participate in this story; Delaware hospitals did not respond, declined to comment or referred us to the Delaware Hospital Association.)

Medical professionals make on-the-spot decisions about how to care for a patient who is in pain or even in crisis, and only tests will give them the information they need. Ideally, Smith said, CMS auditors would give more weight to decisions made in the field, while a crisis is occurring, than to a review.

The cost of the lack of clarity

No one disputes that patients in observation status receive good, quality care. But, the lack of clarity around admission rules, the alarmingly high out-of-pocket expenses observation patient pay and the limited recourse for patients to challenge the status are widely known. Medicare beneficiaries and advocates for them have been protesting observation status care for years but have made little progress beyond the notification legislation.

At a national level, legislation calling for Medicare to count any consecutive three-day hospital stay toward nursing home benefits, introduced annually since 2009, has gone nowhere even though the total number of patients affected is very small, meaning that the cost to Medicare would also be very low. (A study looking at 2009 numbers showed that of more than 1 million total observation stays, just 7,537 (0.75 percent) were
at-risk for high out-of-pocket expenses for skilled nursing care.)

Two recent court rulings indicate patient voices are being heard.

Last July a federal judge in Connecticut agreed to allow all Medicare recipients hospitalized under observation since January 2009 - hundreds of thousands of people - to join a class action suit against the Centers for Medicare and Medicaid Services. Trial is expected this year.

Earlier this year, the United States District Court, Western District of New York, ruled Medicare should pay for skilled care in a nursing home requested for a man who was in observation status for ten days for broken bones in his leg. After several appeals, the courts ruled that discharge to skilled nursing was necessary.